What happened
After competitor HEXO (HEXO) reported third-quarter financial results that fell shy of expectations -- forcing it to rescind its sales guidance for 2020 -- shares of OrganiGram Holdings (OGI) lost 13.6% of their value on Thursday in sympathy.
So what
Only days after the surprise resignation of its chief financial officer, HEXO today reported preliminary fiscal fourth-quarter results that fell far short of its guidance. HEXO now expects audited revenue in a range of 14.5 million to 16.5 million Canadian dollars ($10.9 million to $12.4 million) in fiscal Q4, which is well below the CA$30-million-plus that management implied in its fiscal third-quarter earnings conference call.
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HEXO's shortfall, which the company blames on "lower than expected product sell-through," caused investors to hit the sell button on other cannabis stocks, including OrganiGram, an East Coast grower that's targeting over 100,000 kilograms of annual production soon. For context, OrganiGram reported revenue of CA$24.75 million last quarter, up 621% year over year because of rising production and growing recreational-market demand in Canada.
Now what
The cannabis industry is going through some growing pains. Earlier this year, Canopy Growth's (CGC 2.41%) CEO was shown the door because of higher-than-expected losses, and shares of Aurora Cannabis (ACB -0.15%) fell sharply after the company failed to deliver results as strong as it had previously guided for.
Although lower-than-expected sales growth isn't a good thing, investors should keep in mind that only about 20% of Canada's CA$6 billion marijuana market is currently conducted legally. The potential to significantly grow revenue by shifting more sales away from the black market should improve as supply constraints ease, boosting in-store inventories. And new regulations go into effect later this year allowing for the sale of consumer goods including marijuana as an ingredient. The potential to profit from these opportunities isn't lost on OrganiGram. In addition to investing to boost its production capacity, it's also developing a line of chocolates and vaping products, as well as a powder formulation of marijuana that can be added to beverages.
Nevertheless, the industry is likely to remain under pressure until growing pains ease, so investors might want to sit on the sidelines until top players start reporting earnings that are better than their guidance. As it stands, OrganiGram is slated to update investors on its latest financials on Nov. 25.
